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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

THE McCLATCHY COMPANY

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1 - FINANCIAL STATEMENTS

The McClatchy Company (the Company) and its subsidiaries are engaged primarily in the publication of newspapers located in Minnesota, California, the Northwest (Washington and Alaska) and the Carolinas.

The consolidated financial statements include the Company and its subsidiaries. Significant inter-company items and transactions are eliminated. In preparing the financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary (consisting of normal recurring items) to present fairly the Company's financial position, results of operations, and cash flows for the interim periods presented. The financial statements contained in this report are not necessarily indicative of the results to be expected for the full year.

Acquisition - On January 7, 2004, the Company purchased the assets of the Merced Sun-Star, a daily newspaper in Merced, California and five non-daily newspapers (Merced Group) for $41.0 million in cash. Revenues of the Merced Group in fiscal 2003 (year ended March 31, 2003) were $12.6 million. The purchase included $37.3 million in intangible assets, the most significant of which was $31.1 million of goodwill. Amortization of the goodwill and other identifiable intangibles will be deductible for tax purposes. The useful lives associated with the $6.2 million of identifiable intangible assets range from eight to 17 years. See the discussion of intangibles and goodwill below. The acquisition and results of the Merced Group are included in the Company's financial statements beginning on January 7, 2004. The results of the acquisition on the Company's pro forma combined results of operations for the fiscal year ended
December 28, 2003, or any interim period in the 2003 fiscal year (assuming the acquisition was made at the beginning of fiscal year 2003), was not material.

Discontinued operation - On June 10, 2003, the Company sold the assets of The Newspaper Network (TNN), a national sales and marketing company. The Associated Press purchased TNN's ad processing operations and, separately, Vertis, Inc. purchased TNN's sales and marketing assets. Total consideration from the sales was $14.2 million including the assumption of liabilities. The revenues and operating results of TNN are included in discontinued operations in the Consolidated Statement of Income in fiscal 2003.

Revenue recognition - Advertising revenues are recorded when advertisements are placed in the newspaper and circulation revenues are recorded as newspapers are delivered over the subscription term. Unearned revenues primarily represent prepaid circulation subscriptions.

Cash equivalents are highly liquid debt investments with maturities of three months or less when acquired.

Concentrations of credit risks - Financial instruments that potentially subject the Company to concentrations of credit risks are principally cash and cash equivalents and trade accounts receivables. Cash and cash equivalents are placed with major financial institutions. The Company routinely assesses the financial strength of significant customers and this assessment, combined with the large number and geographic diversity of its customers, limits the Company's concentration of risk with respect to trade accounts receivable.

Inventories are stated at the lower of cost (based principally on the first-in, first-out method) or current market value.

Related party transactions - The Company owns a 13.5% interest in Ponderay Newsprint Company ("Ponderay"), a general partnership, which owns and operates a newsprint mill in the State of Washington. The investment is accounted for using the equity method, under which the Company's share of earnings of Ponderay is reflected in income as earned. The Company guarantees certain bank debt used to construct the mill (see Note 2) and is required to purchase 28,400 metric tons of annual production on a "take-if-tendered" basis at prevailing market prices until the debt is repaid. The Company satisfies this obligation by direct purchase (payments made in the first six months of fiscal 2004 and 2003: $7,152,000 and $7,050,000, respectively) or reallocation to other buyers.

Property, plant and equipment are stated at cost. Major improvements, as well as interest incurred during construction, are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

Depreciation is computed generally on a straight-line basis over estimated useful lives of:

10 to 60 years for buildings

9 to 25 years for presses

3 to 15 years for other equipment

Intangibles and goodwill consist of the unamortized excess of the cost of acquiring newspaper operations over the fair values of the newspapers' tangible assets at the date of purchase. Identifiable intangible assets, consisting primarily of lists of advertisers and subscribers, covenants not to compete and commercial printing contracts, are amortized over three to forty years. Prior to the adoption of SFAS No. 142 in fiscal 2002, the excess of purchase prices over identifiable assets was amortized over forty years. Management periodically evaluates the recoverability of intangible assets by reviewing the current and projected cash flows of its newspaper operations. The increase in intangible assets and goodwill from December 28, 2003 largely resulted from the acquisition of the Merced Group as discussed above, offset by a reduction in capitalized loan origination fees related to the Company's previous debt agreement, which were written off when the debt was refinanced - see discussion at Note 2. Information regarding the Company's identifiable intangible assets as of June 27, 2004 is as follows (in thousands):

Amortization expense was $9,129,000 for the six months ended June 27, 2004. The remaining expense for fiscal 2004 and for the five succeeding fiscal years for intangible assets owned as of June 27, 2004, is as follows (in thousands):

Stock-based compensation - At June 27, 2004, the Company had six stock-based compensation plans. The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, "Accounting for Stock Issued to Employees." No material amounts of compensation have been recorded for these plans.

Had compensation costs for the Company's stock-based compensation plans been determined based upon the fair value at the grant dates for awards under those plans consistent with the method of SFAS Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):

Derivative instruments - The Company records its derivative instruments, primarily interest rate protection agreements (swaps), at fair value in its financial statements. See Note 2.

Deferred income taxes result from temporary differences between amounts of assets and liabilities reported for financial and income tax reporting purposes.

Comprehensive income (loss) - The Company records changes in its net assets from non-owner sources in its Statement of Stockholders' Equity. Such changes relate primarily to valuing its pension liabilities and interest rate protection agreements, net of tax effects.

The following table summarizes the activity in other comprehensive income (loss) for the six months ended June 27, 2004 (in thousands):

	Pre-Tax		Tax		Net Change
Fair value of swap	$ 1,303		$ (521)		$ 782
Other	(33)		13		(20)
	$ 1,270		$ (508)		$ 762

Segment reporting - The Company's primary business is the publication of newspapers. The Company aggregates its newspapers into a single segment because each has similar economic characteristics, products, customers and distribution methods.

Earnings per share (EPS) - Basic EPS excludes dilution from common stock equivalents and reflects income divided by the weighted average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of outstanding shares of common stock and dilutive common stock equivalents in the period. Common stock equivalents arise from dilutive stock options and are computed using the treasury stock method. The antidilutive stock options that could potentially dilute basic EPS in the future, but were not included in the weighted average share calculation in the first six months were 586,560 in 2003. There were no antidilutive stock options for the first six months of 2004.

Long-term debt consisted of (in thousands):

	June 27, 2004		December 28, 2003
Unsecured promissory notes	$ 333,830		$ -
Term loans	-		329,000
Revolving credit line	-		18,000
Total indebtedness	333,830		347,000
Less current portion	-		(142,077)
Long-term indebtedness	$ 333,830		$ 204,923

On May 10, 2004, the Company entered into a five-year, senior unsecured revolving credit facility (Credit Agreement), which provides for borrowings of up to $500 million from a syndicate of banks through May 11, 2009. The primary purpose of the Credit Agreement is to support the issuance of unsecured promissory notes under a commercial paper program (commercial paper) of up to $500 million and for general corporate purposes. Initially, however, the Company used the Credit Agreement to refinance all of its existing term debt and principal outstanding under the previous bank credit facility. This debt was subsequently retired with commercial paper during the second quarter of fiscal 2004. As a result of the refinancing, the Company wrote off capitalized loan fees of $3.7 million related to its previous bank credit facility.

Debt under the Credit Agreement bears interest at the London Interbank Offered Rate (LIBOR) plus a spread ranging from 29.5 basis points to 77.5 basis points plus a utilization fee of 12.5 basis points if borrowings exceed $250 million. Applicable rates are based upon the Company's ratings on its long-term debt from Moody's and Standard & Poor's. Interest on principal outstanding from May 10, 2004 through June 21, 2004 ranged from 1.60% to 1.63%. A facility fee for the Credit Agreement ranges from 8.0 basis points to 22.5 basis points depending on the Company's ratings, and such fees are currently at 12.5 basis points. No amounts were outstanding under the Credit Agreement at June 27, 2004.

The revolving credit facility contains financial covenants including a minimum interest coverage ratio (as defined) of 3:1 and a maximum leverage ratio (as defined) of 4:1.

The commercial paper outstanding at June 27, 2004 had maturities ranging from June 28, 2004 to September 15, 2004, with interest rates ranging from 1.11% to 1.60%. The weighted average interest rate on commercial paper outstanding through June 27, 2004 was 1.18%. Because the Company's Credit Agreement provides backup for its commercial paper, the commercial paper is classified as long-term debt.

The Company's previous bank credit facility included term loans and a revolving credit line, all of which were retired from proceeds under the new debt structure described above. Interest rates applicable to debt drawn down during fiscal 2004 but prior to the refinancing of the previous bank credit facility ranged from 1.7% to 2.7% (excluding the effect of the interest rate swap discussed below).

At June 27, 2004, the Company had outstanding letters of credit totaling $7.0 million securing estimated obligations stemming from workers' compensation claims under the Company's self-insurance plans and other contingent claims.

The Company does not have, nor does it intend to enter into, derivative contracts for trading purposes. The Company has not attempted to hedge fluctuations in the normal purchases of goods and services used to conduct its business operations. Currently there is no intent to hedge or enter into contracts with embedded derivatives for the purchase of newsprint, ink, and other inventories, leases of equipment and facilities, or its business insurance contracts.

The Company had one interest rate swap agreement designated as a cash flow hedge specifically designed to hedge the variability in the expected cash flows that were attributable to interest rate fluctuations on $100.0 million of its variable rate bank debt which expired in June 2004. The effect of this agreement was to fix the LIBOR interest rate exposure at approximately 3.8% on that portion of the Company's term loans.

As of June 27, 2004, the Company was a guarantor of $11.8 million of bank debt related to its interest in Ponderay, a general partnership that owns and operates a newsprint mill in Washington State. The guarantee amount represents the Company's pro rata portion of Ponderay debt, which is guaranteed by the general partners. The partnership was formed in 1985 and began operations in 1989. The debt is secured by the assets of Ponderay and matures on April 12, 2006.

The Company has purchase obligations primarily related to capital expenditures for property, plant and equipment expiring at various dates through 2011, totaling approximately $33 million.

The Company sponsors defined benefit pension plans (retirement plans), which cover a majority of its employees. Benefits are based on years of service and compensation. Contributions to the plans are made by the Company in amounts deemed necessary to provide the required benefits. The Company made $60.0 million in voluntary contributions to its plans in early 2004 and does not currently anticipate any additional contributions in the remainder of fiscal 2004.

The $60.0 million contribution exceeded the amount of net pension liabilities the Company had recognized for its qualified plans. Accordingly, $46.0 million was reclassified to Prepaid Pension and Other Assets in the first quarter to reflect the Company's pre-paid pension status.

The Company also has a limited number of supplemental retirement plans to provide key employees with additional retirement benefits. The terms of the plans are generally the same as those of the retirement plans, except that the supplemental retirement plans are limited to key employees and benefits under them are reduced by benefits received under the retirement plans. These plans are funded on a pay-as-you-go basis and the accrued pension obligation is largely included in other long-term obligations. The elements of pension costs are as follows (in thousands):

The Company contributed $529,000 and $583,000 to multi-employer plans for the three months ended June 27, 2004 and June 29, 2003, respectively, and $1.0 million for the six-month periods in 2004 and 2003.

The Company also provides or subsidizes certain retiree health care and life insurance benefits under two plans, one for employees of McClatchy Newspapers, Inc. and one for employees of The Star Tribune Company. The elements of post-retirement expenses are as follows (in thousands):

The Company's Class A and Class B common stock participate equally in dividends. Holders of Class B common stock are entitled to one vote per share and to elect as a class 75% of the Board of Directors, rounded down to the nearest whole number. Holders of Class A common stock are entitled to one-tenth of a vote per share and to elect as a class 25% of the Board of Directors, rounded up to the nearest whole number. Class B common stock is convertible at the option of the holder into Class A common stock on a share-for-share basis.

The holders of shares of Class B Common Stock are parties to an agreement, the intent of which is to preserve control of the Company by the McClatchy family. Under the terms of the agreement, the Class B shareholders have agreed to restrict the transfer of any shares of Class B Common Stock to one or more "Permitted Transferees," subject to certain exceptions. A "Permitted Transferee" is any current holder of shares of Class B Common Stock of the Company; any lineal descendant of Charles K. McClatchy; or a trust for the exclusive benefit of, or in which all of the remainder beneficial interests are owned by, one or more lineal descendants of Charles K. McClatchy.

In the event that a Class B shareholder attempts to transfer any shares of Class B Common Stock in violation of the agreement, or upon the happening of certain other events enumerated in the agreement as "Option Events," each of the remaining Class B shareholders has an option to purchase a percentage of the total number of shares of Class B Common Stock proposed to be transferred equal to such remaining Class B shareholder's ownership percentage of the total number of outstanding shares of Class B Common Stock. If all the shares proposed to be transferred are not purchased by the remaining Class B shareholders, the Company has the option of purchasing the remaining shares. In general, any shares not purchased under this procedure will be converted into shares of Class A Common Stock and then transferred freely (unless, following conversion, the outstanding shares of Class B Common Stock would constitute less than 25% of the total number of all outstanding shares of common stock of the Company). The ag reement can be terminated by the vote of the holders of 80% of the outstanding shares of Class B Common Stock who are subject to the agreement. The agreement will terminate on September 17, 2047, unless terminated earlier in accordance with its terms.

The Company owns and publishes 30 newspapers in four regions of the country - Minnesota, California, the Carolinas and the Northwest (Alaska and Washington). The Company's newspapers range from large dailies serving metropolitan areas to non-daily newspapers serving small communities. The Company supplements its newspaper publishing with an array of niche products and direct marketing initiatives, including direct mail. The Company also operates leading local websites in each of its daily newspaper markets offering users information, comprehensive news, advertising, e-commerce and other services. The Company also owns and operates Nando Media, an interactive media operation that provides newspapers with content, publishing tools and software development.

The Company's primary source of revenue is advertising. While percentages vary from year to year, and from newspaper to newspaper, local retail advertising carried as a part of newspapers ("run-of-press" or "ROP" advertising) or in advertising inserts placed in newspapers (preprint advertising), generally contributes roughly 40% of advertising revenues at the Company's newspapers. Recent trends have been for certain national or regional retailers to use greater preprint advertising and less ROP advertising, although that trend shifts from time to time. Nonetheless, ROP advertising still makes up the majority of retail advertising. Classified advertising, primarily in automotive, employment and real estate categories, generally contributes about 40% of advertising revenue and national advertising generally contributes about 10% of such advertising. Online advertising, direct marketing and other advertising make up the remainder of the Company's advertising revenues. Circulation revenues contribute ro ughly 15% of the Company's newspaper revenues, depending upon the size and locale of the newspaper. Most newspapers are delivered by independent contractors and circulation revenues are recorded net of direct delivery costs.

See the following Results of Operations for a discussion of the Company's revenue performance and contribution by categories for the first six months of 2004 and 2003.

On January 7, 2004, the Company purchased the assets of the Merced Sun-Star, a daily newspaper in Merced, California and five non-daily newspapers (Merced Group) for $41.0 million in cash. The purchase included $37.3 million in intangible assets, the most significant of which was $31.1 million of goodwill. The acquisition and results of the Merced Group are included in the Company's financial statements beginning on January 7, 2004. See Note 1 to the Consolidated Financial Statements.

On June 10, 2003, the Company sold the assets of The Newspaper Network (TNN), a national sales and marketing company. The Associated Press purchased TNN's ad processing operations and, separately, Vertis, Inc. purchased TNN's sales and marketing assets. Total consideration from the sales was $14.2 million including the assumption of liabilities. The revenues and operating results of TNN are included in discontinued operations in the Company's Consolidated Statement of Income.

On May 10, 2004 the Company entered into a five-year, senior unsecured revolving credit facility (Credit Agreement), which provides borrowings of up to $500 million from a syndicate of banks through May 11, 2009. The primary purpose of the Credit Agreement is to support the issuance of unsecured promissory notes under a commercial paper program (commercial paper) of up to $500 million and for general corporate purposes. Initially, however, the Company used the Credit Agreement to refinance all of its existing term debt and principal outstanding under the previous bank credit facility. This debt was subsequently retired with commercial paper during the second quarter of fiscal 2004.

Debt under the Credit Agreement bears interest at the London Interbank Offered Rate (LIBOR) plus a spread ranging from 29.5 basis points to 77.5 basis points plus a utilization fee of 12.5 basis points if borrowings exceed $250 million. Applicable rates are based upon the Company's ratings on its long-term debt from Moody's and Standard & Poor's. Interest on principle outstanding from May 10, 2004 to June 21, 2004 ranged from 1.60% to 1.63%. A facility fee for the revolving credit ranges from 8.0 basis points to 22.5 basis points depending on the Company's ratings, and such fees are currently at 12.5 basis points. No debt was outstanding under the Credit Agreement at June 27, 2004.

The Company's commercial paper outstanding at June 27, 2004 had maturities ranging from June 28, 2004 to September 15, 2004, with interest rates ranging from 1.11% to 1.60%. The weighted average interest rate on commercial paper outstanding through June 27, 2004 was 1.18%. Because the Company's Credit Agreement provides backup for its commercial paper, the commercial paper is classified as long-term debt.

In the second quarter of fiscal 2004, the Company recognized a charge, primarily consisting of previously capitalized loan fees, of $3.7 million related to its previous debt agreement. The write-off equaled an after-tax charge of $2.25 million.

The most significant trend in revenues for the newspaper industry and the Company has been the decline in employment advertising revenues since 2000. The Company's employment advertising revenues, which reached $190.8 million annually in 2000, declined 41.6% to $111.4 million in 2002. Employment advertising revenues declined an additional 12.0% to $98.0 million in fiscal 2003, but the rate of decline slowed from the second quarter of 2003 through the end of the year, with the fourth quarter declining 6.6% from the fiscal 2002 fourth quarter. Employment advertising improved in 2004 as discussed below.

In the first half of fiscal 2004, total advertising revenues grew 7.4% from the first half of fiscal 2003 to $472.7 million. A rebound in employment revenues of 8.6% from the first half of 2003, together with growth in national revenue and continued growth of Internet revenues, contributed to the increase in advertising revenue for the first half of fiscal 2004. In addition, the Merced Group contributed $5.8 million in advertising revenues for the first half of fiscal 2004. Please see the revenue discussions below under Results of Operations.

The Company incurred three newsprint price increases in 2003, and one in May 2004, resulting in higher prices in the first six months of 2004 compared to the first six months of 2003. In July, three of the Company's newsprint suppliers announced a $50 per metric ton price increase effective for September 1, 2004. It is uncertain whether the amount and/or timing of the newsprint price increase will be implemented as indicated by the announcements. Newsprint pricing is largely dependent on global demand and supply for newsprint. All other things being equal, a hypothetical $10 per metric ton change in newsprint prices affects earnings per share by three cents annually. The impact of newsprint price increases on the Company's expenses is discussed under Results of Operations below.

The Company's fringe benefit costs increased 14.3% over the first six months of fiscal 2003 due primarily to higher retirement and medical costs, and are expected to continue to increase over the remainder of fiscal 2004. With regard to the Company's retirement expenses, historically low long-term interest rates caused the Company to use a 6.25% discount rate to calculate its pension and post-retirement expenses in fiscal 2004 compared to a 6.75% rate used in fiscal 2003. In addition, with an economic recovery anticipated by many analysts over the next several years, the Company believes it is prudent to increase its assumed rate of salary increase from a range of 3.0% to 5.0% used in 2003 to a range of 3.5% to 5.0% in 2004 for its pension plans. These factors will increase the Company's pension expense in fiscal 2004 compared to 2003. (See Note 3 to the Consolidated Financial Statements.) The Company has contributed $60.0 million to its pension plans during the first six months of 2004, and expected earnings on this contribution will partially offset these increases. Nonetheless, the Company expects its pension and post-retirement expense to increase between $4.0 million and $6.0 million in fiscal 2004 compared to fiscal 2003. Medical costs are also expected to rise in fiscal 2004 between $4.0 million and $6.0 million from 2003 levels.

The Company reported net income of $40.1 million or 86 cents per share for the second fiscal quarter of 2004, compared to $37.5 million or 81 cents per share from continuing operations in the second fiscal quarter 2003.

Earnings in the 2004 quarter included a charge related to the Company's recent debt refinancing of $2.25 million after taxes. Total earnings in the 2003 quarter include a gain on the sale of a discontinued operation of 13 cents per share, and were 94 cents including the discontinued operation.

Revenues in the second fiscal quarter, including $3.6 million from the Merced Group, were $296.3 million, up 7.2% from revenues from continuing operations in the second fiscal quarter 2003. Advertising revenues were up 8.1% to $248.0 million and circulation revenue was up 1.7% to $42.0 million.

The following table summarizes the Company's revenue by category for the second fiscal quarter 2004 compared to the second fiscal quarter 2003. In order to allow an analysis of the categories on a comparable basis to fiscal 2003 operations, advertising revenues from the Merced Group are excluded from the advertising categories, and are discussed separately below. Management believes such an analysis is helpful to enable investors to understand the underlying performance of the Company's historical business.

While the Company reviews and evaluates the operations of each individual newspaper, for purposes of organization and ease of understanding, the following table summarizes the second fiscal quarter 2004 revenues at its newspapers operations by region with quarter-over-quarter changes:

1. The California region includes the 2004 revenues of $3.6 million of the Merced Group. Excluding the Merced Group, advertising revenues in this region increased 7.1% and total revenues were up 6.1%.

Retail advertising, excluding the Merced Group, grew $2.3 million over the second fiscal quarter 2003 with about half of the growth coming from preprint advertising inserts placed into the newspapers and half from ROP advertising. Preprint advertising was up $1.1 million, or 3.0% and ROP advertising increased $1.2 million or 2.0%. Much of the revenue increase was from the Company's three daily Bee newspapers in California ($1.2 million) and from the Star Tribune in Minneapolis ($1.6 million). Retail advertising declined in the Carolina and Northwest regions due primarily to cutbacks at major department stores in these regions.

National advertising, excluding the Merced Group, increased $1.6 million, reflecting strong advertising from the entertainment, airline and banking categories. Entertainment and airline advertising contributed $1.0 million of the increase in national advertising. The increase was generated by the Star Tribune in Minneapolis, the News & Observer in Raleigh, NC, and the Northwest regions. The California newspapers experienced relative declines in national advertising due to significant increases in telecommunications advertising in that region in 2003 that diminished in 2004.

Classified advertising, excluding the Merced Group, increased $6.2 million over the second fiscal quarter 2003, mostly from growth in employment and real estate advertising. Employment advertising was up $3.8 million or 15.6% and increased in all regions. The Star Tribune (up $1.5 million) and California region (up $1.1 million) led the Company in employment advertising growth in the second quarter of 2004 compared to the second quarter of 2003. Real estate advertising was up $2.0 million or 8.9% and was also up in all regions. The increase in real estate advertising in the second quarter continued to reflect the national trend in this category.

Other advertising revenues, excluding the Merced Group, increased $5.1 million and primarily consisted of direct marketing and Internet advertising revenues, two of the fastest growing revenue sources at the Company's newspapers. Direct marketing revenues increased $1.5 million with the growth coming primarily from the Company's three Bee newspapers, which have combined to offer direct mail programs to advertisers. Online advertising grew $3.6 million or 54.0% with strong growth in all regions. Employment advertising represents 51.4% of online advertising and increased $2.7 million in the quarter.

The Merced Group contributed $3.2 million in advertising revenues in the second fiscal quarter, including $1.6 million in retail advertising, $1.1 million in classified advertising and $412,000 in direct mail advertising revenues.

Circulation revenues increased $688,000. The Merced Group contributed $180,000 of this increase in the quarter. The remainder of the increase came primarily from the Star Tribune, where volumes increased and promotional discounts were down.

Operating expenses increased 6.6% including $3.0 million from the Merced Group, and were up 5.2% excluding the expenses of the Merced Group. The following review of expense categories excludes the expenses of the Merced Group. Management believes such an analysis is helpful to enable investors to understand the underlying performance of the Company's historical business.

The 5.2% increase in expenses excluding the Merced Group primarily reflects higher newsprint, retirement and medical costs. Newsprint and supplement expense was up 10.5% with newsprint prices up 10.3% and newsprint consumption down 0.1%. Supplement costs were up $584,000. Compensation costs were up 5.5% reflecting salary increases, incentive pay and higher fringe benefit costs. Salaries and incentive pay increased 4.0%. Merit increases of about 3.0% were offset somewhat by a 1.7% decline in head count, but incentive pay and sales commissions increased as revenue and other target goals were met. Fringe benefit costs rose 11.9%, largely due to $2.4 million in additional retirement and medical costs. Other operating expenses increased 4.4% primarily due to increased postage costs associated with the Company's direct mail programs and higher bad debt reserves. Depreciation and amortization decreased $905,000, or 5.3%, largely reflecting lower capital expenditures over the last several years and the e xpiration of useful lives of certain intangible assets.

Interest expense was $2.3 million for the second fiscal quarter 2004. This is a 57.7% decline from the second fiscal quarter 2003, as the Company benefited from lower interest rates, the expiration of three interest rate swap agreements in June 2003, and debt repayment from free cash flow. The Company also recorded $3.7 million as a pre-tax charge to write off costs associated with its recent debt refinancing. See Note 2 to the financial statements and "Refinancing of Debt" discussion under "Recent Events and Trends" above. The Company also recorded $419,000 as its share of Ponderay's income for the second fiscal quarter 2004 compared to $161,000 of income in the second fiscal quarter 2003. In the second quarter of fiscal 2003, the Company recorded a pre-tax charge of $504,000 to write down a certain Internet investment.

The Company's effective income tax rate was 39.7% for the second fiscal quarter 2004 compared to 38.0% in the second fiscal quarter 2003. The lower annual effective rate in 2003 reflects the successful resolution of certain state tax positions the Company took in connection with past acquisitions.

The Company reported net income of $69.0 million or $1.48 per share for the first half of fiscal 2004, which included the non-cash charge of $2.25 million after tax related to its debt refinancing. Earnings from continuing operations in the first half of fiscal 2003 were $62.8 million or $1.35 per share, and were $1.48 per share including income from a discontinued operation. Revenues and expenses in the six-month period were generally affected by the trends discussed in the quarterly comparison above, with exceptions noted below.

Revenues in the first half of fiscal 2004, including $6.7 million from the Merced Group, were $568.6 million, up 6.4% from revenues from continuing operations in the first half of fiscal 2003. Advertising revenues were up 7.4% to $472.7 million and circulation revenues were up 0.7% to $83.5 million.

The following table summarizes the Company's revenue by category for the first six months of 2004 compared to the first six months of 2003. In order to allow an analysis of the categories on a comparable basis to fiscal 2003 operations, advertising revenues from the Merced Group are excluded from the advertising categories, and are discussed separately below. Management believes such an analysis is helpful to enable investors to understand the underlying performance of the Company's historical business.

While the Company reviews and evaluates the operations of each individual newspaper, for purposes of organization and ease of understanding, the following table summarizes revenues for the first half of 2004 at its newspapers operations by region with year-over-year changes:

1. The California region includes the 2004 revenues of $6.7 million of the Merced Group. Excluding the Merced Group, advertising revenues in this region increased 7.3% and total revenues were up 6.1%.

Retail advertising, excluding the Merced Group, grew $4.8 million over the first half of 2003 due to growth in preprinted advertising inserts placed into the newspapers, which was up $2.5 million, or 3.5% and in ROP advertising, which increased $2.2 million or 2.0%. As was noted earlier, much of the revenue increase was from the Company's three daily Bee newspapers in California ($2.4 million) and from the Star Tribune in Minneapolis ($3.3 million), offset by declines in the Carolina and Northwest regions.

National advertising, excluding the Merced Group, increased $4.1 million, reflecting strong advertising from the automotive, banking, entertainment and airline categories, with a decline in telecommunications (primarily in the California region). Banking and airline contributed $2.2 million of the increase in national advertising. The net increase in national revenues was spread among the California, Minnesota and Carolinas regions, while the Northwest newspapers reported a decline in national advertising.

Classified advertising, excluding the Merced Group, increased $8.8 million over the first half of 2003, mostly from employment and real estate advertising growth. As previously discussed, employment advertising was up in all regions and gained momentum as the year has progressed. Real estate advertising was strong in all regions except for the Carolina region, where it declined nominally year-to-date, but was up in the second quarter. The increase in real estate advertising in the Company's other regions reflects the national trend in this category.

Other advertising revenues, excluding the Merced Group, increased $9.3 million and primarily consisted of direct marketing and Internet advertising revenues. Direct marketing revenues increased $2.4 million with most of the growth coming from the Company's three Bee newspapers. Online advertising grew $6.9 million or 55.9% with strong growth in all regions.

The Merced Group contributed $5.8 million in advertising revenues in the first half, including $2.8 million in retail advertising, $2.2 million in classified advertising and $727,000 in direct mail advertising revenues.

Consolidated circulation revenues increased $575,000 with much of the growth from the Merced Group. Circulation revenues at other newspapers increased nominally as increases at some newspapers were offset by declines at others.

Operating expenses increased 5.6% including $5.6 million from the newly acquired Merced Group, and were up 4.3% excluding the expenses of the Merced Group. The following review of expense categories excludes the expenses of the Merced Group. Management believes such an analysis is helpful to enable investors to understand the underlying performance of the Company's historical business.

The 4.3% increase in expenses excluding the Merced Group generally reflects the same factors discussed in the second quarter review above. Newsprint and supplement expense was up 10.0% with newsprint prices up 8.8% and newsprint consumption down 0.9%. Supplement costs were up $1.6 million. Compensation costs were up 5.0%, primarily reflecting salary increases and higher fringe benefit costs. Salaries increased 3.0% reflecting merit increases, which were offset somewhat by a decline in head count. However, fringe benefit costs rose 13.3%, largely due to $5.4 million in additional retirement and medical costs. Other operating expenses increased 3.3% primarily due to increased postage costs associated with the Company's direct mail programs. Depreciation and amortization decreased $2.7 million, or 7.5%, largely reflecting lower capital expenditures over the last several years and the expiration of useful lives of certain intangible assets.

Interest expense was $5.9 million for the first half of fiscal 2004. This is a 44.2% decline from the first half of fiscal 2003, as the Company benefited from lower interest rates, the expiration of three interest rate swap agreements in June 2003, and debt repayment from free cash flow. The Company also recorded $3.7 million as a pre-tax charge to write off costs associated with its recent debt refinancing. See Note 2 to the financial statements and "Refinancing of Debt" discussion under "Recent Events and Trends" above.

The Company also recorded $312,000 as its share of Ponderay's income for the first half of fiscal 2004 compared to $190,000 of loss in the first half of fiscal 2003. In 2003 the Company recorded a pre-tax charge of $504,000 to write down a certain Internet investment.

The Company's effective income tax rate was 39.8% for the first half of fiscal 2004 compared to 38.6% in the first half of fiscal 2003, when the Company recorded the effect of the successful resolution of certain state tax positions it had taken in connection with past acquisitions.

The Company's cash and cash equivalents were $3.8 million at June 27, 2004 versus $3.4 million at the end of fiscal 2003. The Company generated $86.5 million of cash from operating activities for the first six months of fiscal 2004. The major non-operating uses of cash for the first six months of fiscal 2004 have been to purchase the Merced Group, purchase property, plant and equipment, and pay dividends. The Company repaid $347 million of debt under its previous debt agreements and had net proceeds of $375 million for the issuance of debt under its new Credit Agreement. Debt under the Credit Agreement was subsequently retired with proceeds from issuing commercial paper. See discussion of debt refinancing below. The Company paid $11.1 million in dividends for the first half of fiscal 2004, an increase to 12 cents per share from 11 cents, while proceeds from issuing Class A stock under employee stock plans totaled $4.1 million. See the Company's Statement of Cash Flows on page 4.

During the first six months of 2004, the Company made voluntary contributions of $60.0 million to its defined benefit pension plans to reduce the unfunded liability of its qualified pension plans, which totaled $14.0 million at December 28, 2003, and to help reduce pension expense with the earnings on the contributions. Given the anticipated increase in its pension obligations in 2004 resulting from pension expense, and depending on the return on pension assets and the interest rate environment, management considered the $60.0 million contribution to be prudent. The Company may be required to, or may voluntarily opt to, make additional contributions to its pension plans in future years, but does not currently anticipate any additional contributions in fiscal 2004.

The Company expended a total of $23.1 million in the first half of fiscal 2004 for capital projects and equipment to improve productivity, keep pace with new technology and maintain existing operations. Planned expenditures in fiscal 2004 are estimated to be $48.0 million at existing facilities.

On May 10, 2004 the Company entered into a five-year, senior unsecured revolving credit facility (Credit Agreement), which provides borrowings of up to $500 million from a syndicate of banks through May 11, 2009. The primary purpose of the Credit Agreement is to support the issuance of unsecured promissory notes under a commercial paper program (commercial paper) of up to $500 million and for general corporate purposes. Initially, however, the Company used the Credit Agreement to refinance all of its existing term debt and principal outstanding under the previous bank credit facility. This debt was subsequently retired with commercial paper during the second quarter of fiscal 2004.

Debt under the Credit Agreement bears interest at the London Interbank Offered Rate (LIBOR) plus a spread ranging from 29.5 basis points to 77.5 basis points plus a utilization fee of 12.5 basis points if borrowings exceed $250 million. Applicable rates are based upon the Company's ratings on its long-term debt from Moody's and Standard & Poor's. Interest on principle outstanding from May 10, 2004 to June 21, 2004 ranged from 1.60% to 1.63%. A facility fee for the revolving credit ranges from 8.0 basis points to 22.5 basis points depending on the Company's ratings, and such fees are currently at 12.5 basis points. No debt was outstanding under the Credit Agreement at June 27, 2004.

The revolving credit facility contains financial covenants including a minimum interest coverage ratio (as defined) of 3:1 and a maximum leverage ratio (as defined) of 4:1.

The Company's commercial paper outstanding at June 27, 2004 had maturities ranging from June 28, 2004 to September 15, 2004, with interest rates ranging from 1.11% to 1.60%. The weighted average interest rate on commercial paper outstanding through June 27, 2004 was 1.18%. Because the Company's Credit Agreement provides backup for its commercial paper, the commercial paper was classified as long-term debt.

The Company anticipates using cash generated from its operations to reduce its outstanding debt by retiring its commercial paper, until such times that additional liquidity is needed for working capital and other operating needs (such as tax payments and capital expenditures). In the event additional liquidity is needed for such purposes, the Company anticipates that it would increase debt through the issuance of additional commercial paper. The Company considers these fluctuations in its debt to be in the normal course of business and to be immaterial to its operations and financial position given its $500 million borrowing capacity under its Credit Agreement and commercial paper program.

The Company currently has outstanding letters of credit totaling $7.0 million securing estimated obligations stemming from workers' compensation claims under the Company's self-insurance plans and other contingent claims. The Company had $159.1 million of available credit under its current Credit Agreement at June 27, 2004.

The Company does not have, nor does it intend to enter into, derivative contracts for trading purposes. The Company has not attempted to hedge fluctuations in the normal purchases of goods and services used to conduct its business operations. Currently there is no intent to hedge or enter into contracts with embedded derivatives for the purchase of newsprint, ink, and other inventories, leases of equipment and facilities, or business insurance contracts.

The Company had one interest rate swap agreement designated as a cash flow hedge specifically designed to hedge the variability in the expected cash flows that were attributable to interest rate fluctuations on $100.0 million of its variable rate bank debt which expired in June 2004. The effect of this agreement was to fix the LIBOR interest rate exposure at approximately 3.8% on that portion of the Company's term loans.

As of June 27, 2004, the Company was a guarantor of $11.8 million of bank debt related to its interest in Ponderay, a general partnership that owns and operates a newsprint mill in Washington State. The guarantee amount represents the Company's pro rata portion of Ponderay debt, which is guaranteed by the general partners. The partnership was formed in 1985 and began operations in 1989. The debt is secured by the assets of Ponderay and matures on April 12, 2006.

The Company has purchase obligations primarily related to capital expenditures for property, plant and equipment expiring at various dates through 2011, totaling approximately $33 million.

Significant changes in the Company's contractual obligations since year-end 2003 include extending the maturity of its long-term debt to May 11, 2009, through its refinancing (discussed above) and the payment of pension obligations for its qualified plans through the voluntary $60 million contribution. Pension obligations now include $21.4 million of liabilities related to non-qualified plans while the qualified plans have a $41.9 million prepaid balance in other assets.

This quarterly report on Form 10-Q contains forward-looking statements regarding the Company's actual and expected financial performance and operations. These statements are based upon our current expectations and knowledge of factors impacting our business, including, without limitation, statements about plans to further fund pension assets, return on pension plan assets and assumed salary increases, newsprint costs, pension, retirement and medical costs, amortization expense, use of derivative instruments, prepayment and refinancing of debt, capital expenditures, sufficiency of capital resources and possible acquisitions. Such statements are subject to risks, trends and uncertainties. Forward-looking statements are generally preceded by, followed by or are a part of sentences that include the words "believes," "expects," "anticipates," "estimates," or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Secu rities Litigation Reform Act of 1995. You should understand that the following important factors, in addition to those discussed elsewhere in this document and in the documents which we incorporate by reference, could affect the future results of McClatchy, and could cause those future results to differ materially from those expressed in our forward-looking statements: general economic, market or business conditions, especially in any of the markets where we operate newspapers; geo-political uncertainties including those related to war; changes in newsprint prices and/or printing and distribution costs from anticipated levels; changes in interest rates or in the availability of capital; changes in pension assets and liabilities; increased competition from newspapers or other forms of media in our principal markets; increased consolidation among major retailers in our newspaper markets, increased volatility in retail advertising in our newspapers, or other events depressing the level of advertising; changes in our ability to negotiate and obtain favorable terms under collective bargaining arrangements with our employees; competitive actions by other companies; difficulties in servicing our debt obligations; other occurrences leading to decreased circulation and diminished revenues from both display and classified advertising; and other factors, many of which are beyond our control.

Newsprint is the major component of our cost of raw materials. Newsprint accounted for 14.0% of McClatchy's operating expenses for the first half of fiscal 2004. Accordingly, our earnings are sensitive to changes in newsprint prices. We have not attempted to hedge fluctuations in the normal purchases of newsprint or enter into contracts with embedded derivatives for the purchase of newsprint. If the price of newsprint increases materially, our operating results could be adversely affected. For a discussion of the impact of a change in newsprint prices on the Company's earnings per share, please see the newsprint discussion above at "Recent Events and Trends." If our newsprint suppliers experience labor unrest, transportation difficulties or other supply disruptions, our ability to produce and deliver newspapers could be impaired and/or the cost of the newsprint could increase, both of which would negatively affect our operating results.

If McClatchy experiences labor unrest, our ability to produce and deliver newspapers would be impaired. The results of future labor negotiations could harm our operating results. Our newspapers have not endured a labor strike since 1980. However, we cannot ensure that a strike will not occur at one or more of our newspapers in the future. As of June 27, 2004, approximately a quarter of our full- and part-time employees were represented by unions including 58% at the Star Tribune and 23% at The Sacramento Bee, the Company's two largest newspapers. Most of the Company's union-represented employees are currently working under labor agreements, which expire at various times. McClatchy faces collective bargaining upon the expirations of these labor agreements. Even if our newspapers do not suffer a labor strike, the Company's operating results could be harmed if the results of labor negotiations restrict our ability to maximize the efficiency of our newspaper operations.

Changes in the regulatory and technological environment are bringing about consolidation of media companies and convergence among various forms of media. These changes are expected to continue or accelerate as a result of anticipated loosening of regulatory constraints by the Federal Communications Commission. The Company faces competition with larger and more diversified entities for circulation and advertising revenues and further industry consolidation will likely increase this competition. Such consolidation could also affect the Company's opportunities to make acquisitions.

All things being equal, a hypothetical 25 basis point change in LIBOR for a fiscal year would have less than a $0.01 per share increase or decrease in the Company's annual results of operations.

Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a - 15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company's management, including the CEO and CFO, concluded at that time that the Company's disclosure controls and procedures were effective to ensure that information the Company is required to disclose in reports it files or submits, under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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The Company held its annual shareholders' meeting on May 19, 2004 to vote on three proposals. Shareholders approved all of the proposals by voting as follows:

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.